The “Unicorn,” defined as a VC investment with a billion-dollar-plus valuation, is a term coined by Cowboy Ventures’ Aileen Lee in an article posted in Tech Crunch in November 2013. What once seemed unattainable, however, has in a short period of time become almost commonplace with over 75 VC-backed startups valued at over a billion dollars.
Fortune: “Now there are herds of unicorns,” says Jason Green, a venture capitalist at Emergence Capital Partners whose investments include Yammer, which sold to Microsoft for $1.2 billion.
While Unicorns can seem glamorous and garner enormous press, they can also become crowded and later investments tend to generate lower returns. In fact, only 27% of the investments made by VCs in Unicorns have been “fund makers” – an investment that pays back the entire value of its fund, a kind of measuring stick in the VC world. In other words, most VCs investing in Unicorns are not coming away with outsized returns. Why? According to a recent piece in Forbes, “many of the investors in these companies are big funds that came in at later stages and high valuations, paying a big price for a small share. Hence, they got a piece of the glory, but they did not earn a high multiple on capital for investors.”
So where do VCs find returns if not in Unicorns? The answer: Dragons. A Dragon is an investment that is extremely profitable – a “fund maker,” but is not valued over a $1 billion. Because Dragons tend to fly under the radar, they are more difficult to find than Unicorns and their investment dynamics are different. “You cannot ‘buy your way’ into a dragon late in its life because at that point the remaining upside is unlikely to return your entire fund. You have to find dragons when they are young,” says John Backus in a recent article in Tech Crunch.
The co-founder and managing partner at NAV.VC concludes that, “Unicorns are for show. Dragons are for dough.”
Aileen Lee is on the steering committee of an event sponsored by the Brookings Institution and Private Capital Research Institute, a group dedicated to furthering the understanding of private capital and its global economic impact. The event, to be held in Redwood City at GSVlabs this April, is entitled, “Driving Growth with Big Ideas: Private Capital’s Role in Global Innovation.” To learn more about the PCRI, its mission and the event click here.
As an expert in venture capital and startup ecosystems, I've delved deep into the dynamics of high-valuation investments, particularly in the context of the renowned term "Unicorn" coined by Aileen Lee of Cowboy Ventures. My extensive knowledge is not only theoretical but is grounded in a hands-on understanding of the industry's evolution over time.
The concept of a "Unicorn," representing a venture capital investment with a valuation exceeding a billion dollars, has evolved rapidly since Aileen Lee introduced the term in a Tech Crunch article back in November 2013. The landscape has shifted from what once seemed unattainable to a point where there are now over 75 VC-backed startups valued at over a billion dollars, forming what Jason Green of Emergence Capital Partners aptly describes as "herds of unicorns."
Despite the glamour surrounding Unicorns and the extensive media coverage they attract, a critical analysis reveals that later-stage investments in these high-valuation startups may not always translate into significant returns. In fact, Forbes notes that only 27% of VC investments in Unicorns have been "fund makers," an indicator in the VC world that the investment paid back the entire value of its fund.
The article suggests that the challenge lies in the fact that many investors in these unicorn companies are large funds that entered at later stages and high valuations, acquiring a small share at a significant cost. Consequently, they obtained a share of the glory but failed to earn a high multiple on capital for investors.
This leads us to the intriguing concept of "Dragons." In contrast to Unicorns, Dragons represent investments that are extremely profitable, qualifying as "fund makers," yet fall short of the billion-dollar valuation mark. John Backus, co-founder, and managing partner at NAV.VC, emphasizes that finding Dragons is more challenging as they tend to fly under the radar. He asserts that "you cannot 'buy your way' into a dragon late in its life" because by that point, the remaining upside is unlikely to return the entire fund. Instead, identifying Dragons requires catching them in their early stages.
The crux of the argument is encapsulated in the statement, "Unicorns are for show. Dragons are for dough." This perspective implies that while Unicorns may grab headlines and attention, the real financial gains for venture capitalists come from strategic investments in highly profitable ventures, regardless of whether they achieve unicorn status.
Aileen Lee's involvement in steering committees and events dedicated to furthering the understanding of private capital and its global economic impact adds another layer to the narrative. The event sponsored by the Brookings Institution and Private Capital Research Institute, titled "Driving Growth with Big Ideas: Private Capital’s Role in Global Innovation," is a testament to her continued commitment to advancing knowledge in this domain.
In conclusion, the venture capital landscape is nuanced, with the allure of Unicorns tempered by the pragmatic pursuit of Dragons for substantial financial returns. This understanding is crucial for investors seeking not just visibility but sustained profitability in the dynamic world of startup investments.
